Looking to avoid value traps? A historically low share price may seem attractive to an investor who hasn't done their research, but we can protect ourselves by taking cues from the actions of institutional investors, who are known for their in-depth analysis.
We ran a screen with this in mind.
In creating our screen, we began by looking for stocks with troubling accounting signs. While there are many ways to go about this, we chose to look for names with falling current ratios.
The higher the current ratio, the more capable the company is of covering its liabilities. Naturally, a falling current ratio is troubling. We screened for stocks with current ratios that have consistently dropped over three 12-month intervals and fallen below a ratio of 3.
Then, as suggested earlier, we screened these names for those with bearish sentiment from institutional investors, with significant net institutional sales over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to underperform.
Our final list consisted of 5 stocks.
A Closer Look
We looked at Blue Nile Inc. (NILE) in more detail. The stock trades around $34.50 versus its 52-week high of $43.54. The stock is trading with a P/E multiple of 34 times versus its competitor Zale Corp. (ZLC) which trades with a P/E multiple of 31 times.
Turning to the balance sheet, as of December 31st, 2012, Blue Nile has cash & cash equivalents of $87 million, and zero public debt. For the year, the company generated $32 million in free cash flow, part of which was used to buy back common stock. Free cash flow reported was a significant improvement from the $10.1 million generated in 2011. Additionally, Blue Nile has a $35 million credit revolver, which matures in 2014.
Looking at topline growth, sales for the full-year 2012 were $400 million versus $348 million in 2011, up 15%. International sales have shown a year-over-year growth of 29%.
Here is a company with a solid balance sheet, and improving top-line growth. Do you think Blue Nile deserves the negative sentiment?
Interactive Chart: Press Play to compare changes in 1-year return over the last two years for stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
The stocks listed below are signaling two bearish trends, but do you think these names will drop like short sellers and smart money expect? Use this list as a starting point for your own analysis.
1. Constant Contact, Inc. (CTCT): Provides on-demand email marketing, social media marketing, event marketing, and online survey solutions primarily in the United States.
- Market cap at $433.06M, most recent closing price at $14.18.
- Net institutional sales in the current quarter at -3.2M shares, which represents about 10.75% of the company's float of 29.76M shares. The 2 top holders of the stock are FMR, LLC., and St. Denis J. Villere & Company.
2. Harbinger Group Inc. (HRG): Operates as the holding company that focuses on acquiring interests in companies that operate in diverse range of industries.
- Market cap at $1.22B, most recent closing price at $8.49.
- Net institutional sales in the current quarter at -2.7M shares, which represents about 8.09% of the company's float of 33.36M shares. The 2 top holders of the stock are Harbinger Holdings, and Harbinger Capital Partners.
3. IAC/InterActiveCorp. (IACI): Engages in the Internet business in the United States and internationally.
- Market cap at $3.62B, most recent closing price at $40.93.
- Net institutional sales in the current quarter at -4.7M shares, which represents about 6.06% of the company's float of 77.52M shares. The 2 top holders of the stock are Wellington Management, and The Vanguard Group.
4. Blue Nile Inc. : Operates as an online retailer of diamonds and fine jewelry worldwide.
- Market cap at $426.38M, most recent closing price at $34.11.
- Net institutional sales in the current quarter at -695.7K shares, which represents about 5.65% of the company's float of 12.32M shares. The 2 top holders of the stock are T. Rowe Price, and Wasatch Advisors.
5. Penn Virginia Resource Partners LP (PVR): Engages in the management of coal and natural resource properties; and gathering and processing of natural gas in the United States.
- Market cap at $2.18B, most recent closing price at $22.98.
- Net institutional sales in the current quarter at -12.9M shares, which represents about 16.01% of the company's float of 80.59M shares. The 2 top holders of the stock are Neuberger Berman Group, and Kayne Anderson Capital Advisors.
*Institutional data sourced from Fidelity. All other data sourced from Finviz